EMC Shares Regaining Ground; VMware Falling Below Debut Levels

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After plunging nearly 10 percent on news from a Monday night quarterly-earnings call that 2008 revenue growth for virtualization subsidiary VMware would be slightly less than expected, shares of EMC (NYSE: EMC) seem to be rebounding today, reaching $16.30 by noontime, only a dime or two below the pre-call levels.

Apparently investors feel there’s little need to punish EMC for VMware’s readjusted earnings expectations. Instead, they’re punishing VMware (NYSE: VMW) directly: shares in the subsidiary are still trading around $56.00 today, down about 30 percent from Monday’s levels. For the first time, the stock has dipped below the price at which it debuted in last August’s much-vaunted IPO, erasing the last of the gains recorded as shares climbed to a peak of about $124 last Halloween.

On the surface, it’s hard to see why such a small change in earnings projections—VMware said it would bring in $2.00 billion this year, as opposed to the $2.08 billion Wall Street analysts had been expecting—provoked such a dramatic drop in VMware’s share price (and in the process lopped billions of dollars off of VMware’s total valuation). But the sudden deflation may simply reflect the final settling-in of perceptions that, as we observed back in November, VMware is competing in a market where virtualization software is quickly becoming commoditized and the biggest customers have already anted up. Any result short of a surprising surge in fourth-quarter revenues was probably guaranteed to reinforce investors’ looming concern that, as UBS analyst Heather Bellini put it in a research note, the “low hanging fruit may have been picked.”

EMC itself performed better than expected in the fourth quarter of 2007, bringing in $526 million, 35 percent above revenues for the same quarter of 2006—which may be helping to mitigate the impact of investors’ shifting perceptions of VMware.

Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast